Nov 19, 2013: Last weekend we were wondering how many Americans live without bank accounts. Our first thought was not many. Curious to know the facts we started researching on the web. We were stunned to find that 17 million Americans have no bank accounts! And 18% of the rest of the population that do have bank accounts use non-traditional banking services like pawn shops and payday lenders [1]. These are just a few of the findings of a new government (FDIC) survey on Americans' access to basic banking services. This survey tallied responses from roughly 54,000 U.S. households.

Taken together, at least 25.6 percent of U.S. households, close to 30 million, are either unbanked or underbanked. Approximately 60 million adults reside in these households.

According to the study, the most common reason cited for being unbanked was a lack of funds. More than a third of those considered "unbanked" said they did not have enough cash to warrant having a bank account. Another point that emerged from the survey, was that many Americans that actually have bank accounts still looked elsewhere to cash their checks, borrow money and used prepaid debit cards for their money transactions.

Nearly 18% of all U.S. households have relied on pawn shops, payday lenders or check-cashing outlets at least once in the past five years. That is quite a huge figure considering the fact that these type of businesses are often criticized for charging humongous consumers rates. For example, in some cases, borrowers pay the equivalent of an annualized interest rate as high as 500%!

But certain money transactions make sense to people who are unbanked primarily due to paucity of funds for maintaining a minimum balance at a bank. Here is a real life story of a person named Al Walker, a graduate of American University (2006), who uses non-traditional banking methods (despite FDIC warnings) to cash his check without a bank account, payday loans and the likes:

I don't have to worry about them posting anything to my account. I don't have to worry about them taking anything from my account. I don't have to worry about an overdraft fee here. I don't have to worry about overdraft protection. I don't have to worry about whether this is free. I know what I'm paying; it's the same every time I come here — and maybe that's something banks should look into. I have an extreme distrust and, I guess, disdain for banks, because so many of them have done me and my money wrong.

Walker was recently laid off from a doctor's office. He uses services from places like ACE Cash Express to cash unemployment checks. Walker pays bit less than $5 each time he gets an unemployment check. On the contrary, if he had used a traditional checking account, there'd be no fee at all!

Like Walker, most people who were polled in the survey said that they continued to use these services simply because they were easy and convenient.

According to the 2009 FDIC National Survey of Unbanked and Underbanked Households [2], an estimated 21.7% of black households, 19.3% of Hispanic households, and 15.6% of American Indian/Alaskan households are unbanked. The proportion of unbanked and underbanked households varies across different regions of the country, with the highest incidence in the Southern Region. In fact, nearly 20% of all U.S. households earning $30,000 or less per year did not have a bank account. The survey also found that almost a quarter of all households headed by someone who didn't finish high school were considered "unbanked" [1].

In an effort to aid consumers migrate away from such expensive options, the FDIC has enacted a number of initiatives including a short-term loan pilot program it launched in February 2008 [2]. A select group of banks who are a part of FDIC's program, have agreed to offer short-term loans of up to $2,500 to low-income Americans. In fact, FDIC's recent survey was yet another effort to expand consumers' access to basic financial services. FDIC Chairman Sheila Bair said in a statement:

By better understanding the households that make up this group, who they are and their reasons for being unbanked or underbanked, we will be better positioned to help them take that first step.

However, the banking community so far have not shown much interest in reaching this segment of Americans. According to the survey's poll, less than 20 percent of banks said reaching out to these communities was one of their priorities.

What are your views about Americans who are living without bank accounts? Is their choice of paying substantial fees for their money transactions a justified decision when they could have had free checking accounts? Can this situation be improved by educating Americans about personal finance right from middle or high school?

I always used to think it was mostly undocumented immigrants who didn't have bank accounts, since you get so much harassment about identifying yourself when you try to open an account. But recently I've realized that's not so at all. Many US citizens do a lot of business off the grid and do not want a paper trail reflecting their real income.

For example, even though restaurant workers have to pay a presumptive tax on their tips, many collect more than the government assumes they do. They pay only the required tax and pocket the rest. And I know people who have de facto yard sale businesses -- instead of just selling their own junk once a year, they collect other people's throwaways or buy yard-sale junk from other folks cheap, then organize new sales once very month or two. None of the cash from those sales goes into a bank account. Same is true for people who do handyman and yard work: anything that's paid in cash can be spent in cash, with no tax bite taken out of it.

If most or all of your income is earned off the books, it would be counterproductive to be fully "banked."

FIRE Finance
said...

@Funny about Money

We too had similar notions as yours regarding people who use non-traditional banking. But on doing research we were amazed at the findings!

Also, thanks for the eye opener on how people use cash transactions and non traditional banking to evade taxes. Amazing!

Thanks for your feedback :).

Len Penzo
said...

Great article! I had no idea how may people went through life without bank accounts.

It boggles the mind why some people are willing to put up with the fees imposed by some establishments for cashing checks through non-traditional checking accounts.

Best,

LenLen Penzo dot Com

Helen
said...

@Funny: While I agree that it can be difficult to collect taxes from many types of small businesses, I think that the proportion of companies that engage in such practices are evenly spread across the nation while FIRE's map shows that the percentage of unbanked individuals is higher in states with lower per-capita income. I don't think that folks in Missisippi are more dishonest, I think they have less income and are therefore more likely to not have access to proper banking.

@FIRE: Nice post and good research. It's hard to believe that so many Americans don't have access to simple banking, but then it's hard to believe that 13% of Americans live below the poverty line (including 19% of people under age 18). Would be nice to propose some solutions.

FIRE Finance
said...

@Len Penzo

Even we were perplexed at the idea of people paying such high fees for cashing checks. But perhaps lack of money to maintain a bank balance or ignorance about the existence of really free checking accounts (especially online) coerce people to go for such options.

Thanks for your feedback :)

FIRE Finance
said...

@HelenThanks for your feedback. America offers a free economy with aid of different types for people living below the poverty level. One way of getting out a low income loop might be to get an education. The other day we were shocked to read (Costco Connection) that every minute a student drops out of high school! A good education definitely has value and helps in improving one's earnings.

But that's our take, there might be several non traditional ways of getting out of poverty :).

Dave Minnich
said...

Banks are pricing themselves out of customers with all of their crappy fees and practices. I actually earn good money and am financially literate, but hate having to constantly monitor my account lest these Shylock institutes hit me with some fee. So I have gone bankless thanks to pre-paid debit cards.

Frank @ Free Gasoline
said...

I am not an American but this figures are unbelievable. How come a person does not use banking services?

Anonymous
said...

I am in the process of releasing myself from both banks and credit unions that supposedly have lower fees and are more fair to the customer. Trust me, after my credit union just raised its fees, I am stopping all banking services. I need to get back in touch, literally, with my own money, and keep bank and credit unions hands off my money. I'd rather pay for money orders and cashier's checks and know what I have and what I don't rather than be shocked when I check my account on payday to find it's overdrawn. I will educate myself about money, starting from square one, rather than have a bank rip me off every chance they get. You can cash your check without an account on the bank your paycheck is written from without fees, I believe. Either way, the fees are MUCH less than overdrafts and fund transfer fees. Thanks for nothing, banks and credit unions. I'm in control now, not you thieves. Banking is nothing but legalized thievery, and no one is protecting the middle class anymore. Time to make banks sweat now!!!

Anonymous
said...

I am so happy to learn there are others who have already done what I am in the process of doing now - closing any bank and/or credit union accounts (they're no better than banks to my surprise). Last payday, I found myself overdrawn on the DAY I got PAID thanks to auto bill payments and credit union fees. Yes, I've mismanaged my money, yes I am responsible, but I did not put myself in this position without "help." Banks, loans, exorbitant fees, credit unions, Wall Street, sending American jobs overseas and hiring illegal aliens, increasing taxes on the middle class, and America giving to foreigners what they don't give their own citizens - free education, loans for businesses, etc. I am going back to basics. I've lost touch with my own money and faith in my own government to help the middle class - it has become like playing with Monopoly money because I never see it and everyone has their hand in it until there's nothing left for me. I've lost all control of my own finances. I'm going back to basics, and I'd like to remember what it's like to cash my check and hold my own income in my own hand. It's gonna feel good again, I think. For once, GOOD for ME.

Anonymous
said...

Good for everyone who is taking back the control of their finances! I'm in the process of doing the same, very difficult because I run my own business.

As far as "evading taxes" hogswallop! If you breath you pay taxes. I have never evaded paying my taxes. I pay taxes on my car, my home, everything I buy, every bill I pay, on and on and on. I think it is impossible to evade paying taxes unless you make millions of dollars a year and even then, you get caught by the taxman.

However, I think we can and should cut out the middleman. We should all stop paying people to do nothing but handle our money. It's our money and we should take responsibility and handle it ourselves!

Anonymous
said...

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Jeanine Frank
said...

Most low income families have trouble with credit. Additionally, our society endorses debt, albeit managed debt, as being a desirable state of affairs. Traditional banking takes some hard stances on mismanaged money. The fees are crazy ($35 per overdraft). The low or no balances this population typically carry make dignity a problem at the teller window. Then, of course, is the problem of having a balance in a bank acct-it counts against the holder when seeking welfare monies. Or how about not being able to cash a check unless you have enough in your acct, should the check bounce? Finally, fall prey to credit collections-be they govt or private-and watch any monies you have in a bank acct disappear. All this is avoided if the cash is simply kept as cash-pay the check cashing fees (charged even if the check is presented for payment at the bank it is drawn on!). Avoid the invasion of the bank into your private life-all the information provided (incl transactions) will be given to anyone with legal cause. Enjoy the shock value of paying cash. Stop worrying about overdrafts and garnishments by doing away with the vehicle that allows them. Get your financial dignity back by no longer apologizing for low balances, begging to cash a check despite an unequal balance. Accept that bank accts are only for those that have and aren't a risk...which is why most major banks do not offer free checking accts!

H Basu
said...

@Jeanine Frank

Thanks for your feedback. Both sides have their pluses and minuses. Often, it's the same story of those who have power rule those who don't :(.

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